Court jails two over warrants rebate scam

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Two investors who manipulated the market for Macquarie Bank derivative warrants to collect more than HK$1 million in commission rebates have been sentenced to jail.

Deputy District Judge Sham Siu-man yesterday sentenced Francis Lee Shu-yuen to three years in jail and Patrick Fu Kor-kuen to two years and nine months. Fu received a lighter penalty because of his clean record and the fact he made donations to help the elderly, the poor and orphans.

The pair were ordered to share the cost of the Securities and Futures Commission investigation amounting to HK$1.4 million. The offences occurred between January 2004 and January 2005.

'When it comes to protecting investors and restoring public trust in financial markets, the court cannot pass the buck and should be very tough by passing sufficiently deterrent sentences,' Mr Justice Sham said. 'Market manipulation should not be tolerated.'

Mr Justice Sham said this case was not the most serious type of market manipulation as it did not involve setting up a dummy company, a breach of trust or corrupt payments. The maximum penalty for market manipulation is 10 years in jail and a HK$10 million fine.

Fu and Lee were clients of two brokers - Grand Investment (Securities) and Shun Loong Securities Company - which participated in the Macquarie Equities (Asia)'s commission rebate programme. Under the programme, Macquarie gave a rebate to investors through their brokers to encourage warrant trading.

Since the rebate programme generated huge commission rebates, the two brokerages gave clients discounts on large volume trades. As a result, Fu and Lee were able to generate risk-free profits from the difference between commission rebates and the discounted brokerage costs.

They exchanged the warrants between themselves over a 13-month period to earn a profit of slightly over a HK$1 million in rebates. Their trading however created a false impression of heavy trading in the warrants. On one occasion, Fu and Lee conducted 400 trades in 60 minutes, or one transaction every 10 seconds.

In mitigation, the defendants' lawyers argued there was no evidence other investors had suffered losses.

The SFC last year fined the brokerages involved in the case, including Macquarie, between HK$2 million and HK$4 million each. It had earlier banned the rebate scheme.

Mark Steward, the SFC's executive director of enforcement, said the case demonstrated once again that the courts considered market manipulation a serious offence.